Recently I blogged about the huge transformation underway in the financial services space and how the industry is being fueled by a wave of innovation and entrepreneurialism that mirrors that of the tech industry.
Today, there are more alternative financial companies that I’ve ever seen in my entire life. Whether its new forms of payment technology, emerging models for lending capital to business, or new devices that make financial transactions faster and more convenient, the fintech space is thriving.
Houston, we have a branding problem
So how did these new entrants come into the fintech space to begin with? I’ll start the conversation by first stating that traditional financial services companies like banks and insurance organizations have a brand problem. To be perfectly candid, a lot of people don’t trust banks. You rarely see bankers portrayed in movies as sympathetic, likeable protagonists. I’m not saying that perception is fair, but banks are indeed struggling these days in terms of their brand and reputation.
Disruptive companies are often borne out of branding problems. On-demand driving services like Lyft and Uber, for example, didn’t gain traction in the market because of their superior analytics, but rather than taxis had a brand problem. Airbnb, in another example, gained success because hotels have a brand problem with many non-business travelers.
The lack of trust and feeling of disenfranchisement that many consumers feel about the banking, investment and insurance industries is at the core of this wave of innovation in fintech. As a result, the financial services market expanded to accommodate the demand from consumers looking for more flexible, convenient and easy ways to send, manage, save and invest their money.
Do you not totally believe that premise? Then why have online Insurance quotes become more like one-click shopping experience on Amazon? Insurance fintech companies such as Esurance were one of the first innovators that drove change, only to be acquired by Allstate, an arguably more traditional insurance company. The effect of insurance fintech companies was not unnoticed by the industry.
Redefining banks, lenders and everything in between
Additionally, it should be noted that at no point in time has the business relationship of companies to traditional banks ever been more disrupted.
Let’s look at the historic way that businesses began. When I grew up, when you wanted to start a business, you went to the bank and you got a loan. Business owners today can launch a company without ever involving a bank, thanks to peer-to-peer platforms like Kickstarter where you can find investors within hours with a just a mouse click. I am not saying that having a bank account wouldn’t make it easier to engage in a business. The relationship has changed though.
The way we pay for things has also radically evolved. With the emergence of Bitcoin, even the definition of currency has changed. These days “fintech” can encompass pretty much anything – it’s no longer limited to payment processors. It’s becoming increasingly difficult to define what makes a company a “lender” or a “bank.” For example, is Kickstarter a lending company now, if its members help to launch a business? Amazon now “lends” to small businesses anything they need based upon an algorithm.
What about equipment manufacturers? Are they lending organizations? Increasingly, the answer is yes. When it comes to purchasing large equipment – say, a tractor from Caterpillar – you’re no longer tied to a traditional bank to process your loan. Many Fortune 500 companies (including Caterpillar, Allstate and State Farm) are entering the financial services space, allowing customers to bypass banks and self-finance directly through the manufacturer or insurer.
Don’t lose sight of the data
And let’s not forget about the data security story here amid this financial services feeding frenzy. Financial organizations possess a massive, sprawling footprint of sensitive consumer and business data encompassing credit reports, credit histories, payroll information, tax information and more.
The challenge comes when the industry evolves at such a rapid pace without ensuring that the protections, governance and controls associated with the traditional financial world remain in place. This presents an urgent and critical call to action for emerging fintech players to prioritize data security and governance and to educate themselves about the industry-specific regulations and requirements specific to the financial services sector. For example, Social Finance (SoFi) recently settled with authorities around their use of “soft pull” of consumer’s credit reports that were used in marketing campaigns.
Many of the new entrants to the space are founded by teams that lack a formal financial or banking background – they may come from internet or tech companies, for example. As a result, they may not even know to ask the most basic, but very critical, questions about data storage and protection, as well as industry regulations and policies specific to financial organizations:
- Should I use encryption?
- Have I implemented solid security controls around storage?
- What regulations like GLBA, Dodd-Frank, Glass-Steagall, and FCRA impact a fintech startup and their usage and governance around consumer data? (with a small “trick” question in there)
- How can I avoid becoming the next security breach waiting to happen?
Will banks become obsolete?
Despite its rapid growth, remember that we’re still early in the game when it comes to fintech. It’s premature to say that traditional banking organizations will fade away entirely, the reality is that there has to be some bare minimum of a construct for businesses to make and sell goods and services. You might be buying supplies via some form of alternative lending versus writing an old-school paper check, but you’ll still, in some form or another, leverage a financial services organization. European banks are already starting to broker partnerships with fintech companies to better meet their customer’s needs. Insurance companies acquired most of the insurance fintech startups, so that route is possible as well. Disruption will inevitably change the current order of things a little bit, but I don’t foresee any major downfall of the industry.
I’d like to close with a quote from Clayton Christiansen’s book, The Innovator’s Dilemma about the origins of disruption:
“Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use”